MC 30 | Why five schemes go out of Moneycontrol list of top mutual funds?

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MC30 is Moneycontrol’s curated basket of 30 investment-worthy schemes. The reason why MC30 exists is to give you— our dear reader—a more manageable number of schemes (30) to choose from a large offering of more than 1,000 mutual fund (MF) schemes out there. Because all you need is about 7-12 MF schemes in your portfolio. MC30 schemes have a variety of actively-managed and passively-managed schemes, across categories. It is our endeavour to keep this basket as steady as possible.

But over time, lots of things can change for an MF scheme. Sometimes, the fund manager’s calls go horribly wrong. Or worse, the after-effects of multiple such calls linger for way too long to ignore. A change in fund management also usually calls for a change of schemes in MC30, till the time we’re convinced there’ll be continuity in the way stocks have been picked. Or sometimes, there could just be better alternatives; the existing MC30 scheme may not be a bad one.

Whatever be the reason, if new schemes come in, then an equal number of schemes go out. This year, five new schemes enter MC30. Hence, five schemes go out. Let’s meet the ones that bid goodbye to MC30.

Read MC30: The methodology behind the curated basket of mutual fund schemes

Axis Midcap Fund

The main reason why all three Axis Mutual Fund’s equity schemes go out of MC30 is the fund house’s recent brush with corporate governance with regard to its front-running episode. On February 28, the capital market regulator, the Securities and Exchange Board of India (SEBI) came out with an interim order that barred Viresh Joshi, the fund house’s former chief dealer, from accessing capital markets. SEBI named Joshi as the chief conspirator in front-running at Axis MF and identified Rs 30.5 crore as wrongful gains accrued due to the alleged front-running activities.

The fund house has been in clean-up mode. On March 9, the fund house announced that B Gopkumar will be the next Chief Executive Officer (CEO) at Axis AMC. Its present CEO Chandresh Nigam will step down on April 30, the last day of his term. In addition, the fund house also appointed Ashish Gupta as its new chief investment officer.

While this is good news for the fund house, we feel it’s time to exit Axis AMC’s equity schemes for now, till we hear from the new leadership and how the fund house plans to turn itself around.

Axis Midcap Fund (AMF) is one of the few schemes that has been consistent in delivering above-average returns across places. The fund manager of the scheme prefers companies that have free cash flows, low debt levels, and good corporate governance. The scheme takes active cash calls. It has held up to 20 percent of its assets in cash at times. Existing investors can continue in this scheme for now but fresh inflows, including SIPs, can stop. Allocate further inflows to other MC30 mid-cap funds.

Also read: How to use MC30?

Axis Small Cap Fund

Axis Small Cap Fund (ASF) too goes off MC30 for the same reasons that have been plaguing the fund house for the past year.

Although the scheme itself has done well in both rising and falling markets. Active cash calls have cushioned the heavy market falls. ASF scores on the Sortino ratio too; this shows the fund is less volatile than many peers.

The fund manager of the scheme looks for quality companies with long-term sustainable growth and management track record. He believes that only 'quality' companies can sustain profitable growth and generate long-term returns for shareholders.

Axis Focused 25 Fund

Here again, Axis Focused 25 goes out for the fund house’s brush with the regulator. The fund manages a concentrated portfolio of up to 25 stocks. It follows a flexi-cap approach of investing across large, mid and small-sized companies. As of February 2023, the allocation to large and midcap stocks was 79 percent and 6 percent, respectively. It had nil exposure to small-cap stocks, currently.

To reduce the fund’s risk levels on account of concentrated holdings, the manager invests about half the corpus in low-volatility stocks. The remaining portfolio gets invested in cyclical and emerging themes that give a return-kicker to the fund.

Although we believe that the fund house is in a clean-up mode and things are more likely to improve in the coming months, fresh inflows can stop in this fund for now. We shall revisit the fund house later.

DSP Midcap Fund

DSP Midcap Fund (DMF) moves out of MC30 due to its average performance. Its rating slipped to 2 stars, as per our internal rating system over the past one year. Though DMF has seen better days in the past, it has struggled in the past two years. “Last two years have been challenging in terms of performance for the scheme as our core style of ‘buy and hold’ strategy and the quality businesses that we hold have not performed relatively well,” says Vinit Sambre, Head – Equities at DSP Investment Managers and fund manager of the fund.

The fund manager’s expectations on sectors like pharmaceuticals, specialty chemicals and agriculture-based companies didn’t quite work out over the last two years. The midcap banks and NBFC stocks that he held in the portfolio also did not perform well as expected. There are better alternatives than DMF in the midcap space.

Invesco India Mid Cap Fund

Invesco India Mid Cap Fund (IIMF) is a decent scheme, but it moves out because there are more screaming buys elsewhere.

Its growth investment style and relatively underweight position in PSU and banking sectors led to underperformance over the last two years. IIMF is also one of the relatively better-performing schemes in the midcap category.

The fund manager of the scheme looks for scalable business models that exhibit superior return ratios and generate healthy free cash flows over a longer timeframe. He avoids companies which look to focus on growth by compromising on the balance sheet.

Also see: The complete MC30 basket of mutual fund schemes